## Section 7

# Profitability Ratios

Book
Version 3

By Boundless

By Boundless

Boundless Accounting

Accounting

by Boundless

5 concepts

Basic Earning Power (BEP) Ratio

The Basic Earning Power ratio (BEP) is Earnings Before Interest and Taxes (EBIT) divided by Total Assets.

Return on Common Equity

Return on equity (ROE) measures how effective a company is at using its equity to generate income and is calculated by dividing net profit by total equity.

Return on Total Assets

The return on assets ratio (ROA) measures how effectively assets are being used for generating profit.

Profit Margin

Profit margin measures the amount of profit a company earns from its sales and is calculated by dividing profit (gross or net) by sales.

Operating Margin

The operating margin is a ratio that determines how much money a company is actually making in profit and equals operating income divided by revenue.